Chinese shares closed sharply lower on Wednesday, with the benchmark Shanghai Composite Index closing at 4,053.09 points, down 281.64 points, or 6.5 percent, from the previous close.

The index, which tracks both yuan-denominated A shares and hard-currency B shares traded on the Shanghai Stock Exchange, closed at 4,335.18 points on Tuesday.

The Ministry of Finance announced on Tuesday night that it would raise the stamp tax on securities trading from the previous 0.1 percent to 0.3 percent beginning May 30.

An official with the ministry said the tax rise, which has been approved by the State Council, is intended to help promote the healthy development of the securities markets.

This move came two weeks after China announced hikes of benchmark interest rates and bank reserve requirements as well as widening the yuan floating range against the US dollar, in a bid to curb excessive liquidity and cool the overheated economy.

 

"It is a drastic correction and will increase cost of transactions quite a lot," said Cai Zhizhou, a researcher with Peking University.

 

"This move aims for a more rational sentiment among investors," he said.

 

China imposed a six-per-thousand stamp tax on stock transactions when its stock markets were created in 1990. The tax rate was later readjusted several times, with its latest change occurring in 2005, when the government halved the tax rate from 0.2 percent to 0.1 percent in a bid to boost the depressed equity market.

 

Driven by the huge transaction volume, China's securities stamp tax revenue more than doubled in 2006 to 17.95 billion yuan (US$2.24 billion). The first quarter figures for 2007 have skyrocketed 516 percent compared to last year's numbers, totaling 12.1 billion yuan.

 

(Xinhua News Agency May 30, 2007)